Investing in Sin Industries: Are They Worth the Hassle ?

Some professions in the world are not considered to be as acceptable as others. This notion of acceptability is widely influenced by the cultural norms in the society where one is conducting business. However, in the modern world, being associated with sin does not seem to be much of a deterrent to investors. Cities like Las Vegas, Atlantic City and even Macau are literally run by these sin industries. The bustling economies of these cities are testimony that investors indeed support these businesses. However, sin industries are always vulnerable to moral attacks. In the past, they have also been banned by many states and nations only to come back again either as a legalized industry or as part of shadowy grey markets.

In this article, we will consider the pros and cons of investing in sin industries.

What are Sin Industries ?

Religious beliefs designate certain activities as being sinful. Industries that have their business models built around such activities are called sin industries. In the modern world, conducting this business is legal in many countries. However, regardless of the legality, the activities of these industries are largely frowned upon by the entire society.

Common businesses associated with the term sin industry are liquor business, tobacco business, pornography, gambling and businesses related to war and weapons.

The Argument in Favor of Sin Industries

Many magazines and experts have been advising individual investors to consider sin stocks for better returns. There have been many reasons quoted that work in favor of these industries:

• Sin industries are shunned by institutional investors, mainstream investors and also analysts. Therefore the likelihood of such stocks being overvalued is negligible. They usually trade at fair value.

• People indulge in sinful behaviors regardless of economic cycles. Therefore such businesses are recession proof and provide a stable stream of predictable cash flow

• The stigma associated with the business creates an environment of less competition and these businesses easily generate double digit returns.

• The demand for the products and services being sold is relatively inelastic. Therefore companies have higher pricing power and more bargaining power over their customers.

• Customers who indulge in sinful activities are willing to pay cash up front. As such this is a cash rich business with very little requirement for working capital.

Companies like Diageo, Philip Morris and Caesar’s Entertainment are some listed stocks belonging to this industry.

The Real Costs

The sin industries may be beneficial to a group of investors. However, they are definitely against the interest of the society as a whole. Not only do they lead to a loss of moral fortitude but they also significantly affect the financials. Here are some of the side effects of the so called “sin industries”

• Healthcare: Sinful activities are also bad for health. Consider the health hazards faced by alcoholics and tobacco addicts. Also consider the extreme health hazards faced by people working in the porn industry. A lot of these people are too poor to take care of their ill health. Most of their money has been siphoned off by these sin industries. Hence, the cost of their heath care is a burden on the society. American taxpayers pay billions of dollars in healthcare expenses in lieu of the profits generated by private parties from these industries. This is the reason why the taxation levied on this industry has become steep in the recent past. However, companies just pass it on to the consumers who have to pay up because of the inelastic demand.

• Social Security: People that indulge in such sinful activities are also unfit for work. Barring porn and gambling industry, almost all other sin industries leave their customers unemployed. Countries like United States have welfare programs wherein unemployed people are paid money to maintain their living standards. Once again billions of dollars are given as handouts to people who then go ahead and spend majority of it on sin industries! The revenue clocked by these industries is therefore taxpayer money that has been embezzled.

• Law Enforcement: When consumers addicted to the products of sin industries are in financial woes, they tend to go down the path of crime. Loan sharking, mugging people, battery and even murder are some of the crimes commonly associated with sin industries. Governments therefore have to spend billions of dollars making their police force more capable of dealing with these issues. Although direct causation is not present, a large number of crimes would be stopped if sin industries were regulated or abolished.

Conclusion

Sin industries are indeed profitable and will continue to be so. As an individual investor, it does make financial sense to invest into stable businesses with regular streams of cash flow! However, from a societal point of view, these businesses are loss making. Even if we were to ignore the human misery, the sheer amount of financial duress faced by the society makes these businesses unviable.

Sin industries are therefore a scheme of distribution of wealth. They end up transferring public money into private hands in the most despicable way imaginable.